Reducing Inflation Act and Home Improvement Tax Credits


If you’re planning a few home improvements that will increase your home’s energy efficiency, you can save money on your projects now that the Cut Inflation Act has been enacted. One of the main objectives of the bill is to fight climate change and slow down global warming. And while the legislation primarily helps businesses adopt more environmentally friendly measures and jump-start clean energy production, there are incentives for ordinary Americans to go green and save green, too.

For example, homeowners can reduce their tax bill even further if they install new energy-efficient windows, doors, water heaters, heaters, air conditioners, etc. That’s because the legislation extends and enhances two tax credits that reward “green” improvements to your home. (There are also new tax breaks for buying electric vehicles.) Low- and middle-income families may also qualify for rebates if they buy energy-efficient appliances. With these changes, it’s a little easier to go green for US owners.

Credit for improving the energy efficiency of homes

One of the tax credits homeowners may be familiar with – the Non-Commercial Energy Goods Credit – actually expired at the end of 2021. However, the Inflation Reduction Act revives it, improves it considerably and even gives it a new name – the credit for improving the energy efficiency of homes.

The old, expired credit was worth 10% of the cost of installing certain insulation, windows, doors, roofing, and similar energy-saving upgrades in your home. You could also claim the credit for 100% of the costs associated with the installation of certain energy efficient water heaters, heat pumps, central air conditioning systems, furnaces, hot water boilers and circulating fans. However, there was a lifetime limit of $500 for the credit (for example, credits taken in previous years counted towards the limit). There was also a $200 lifetime limit for new windows. These limits severely restricted the overall credit value. There were also other individual credit limits for circulating fans ($50); some furnaces and boilers ($150); and some water heaters, heat pumps and air conditioning systems ($300).

The credit is reinstated for the 2022 tax year and the old rules apply. However, starting in 2023, the credit will be equal to 30% of the costs of all eligible home improvements made during the year. It will also be expanded to cover the cost of certain biomass stoves and boilers, electrical panels and related equipment, as well as home energy audits. However, roof and circulating fans will no longer qualify for the credit. Some of the energy efficiency standards will also be updated.

Additionally, the lifetime limit of $500 will be replaced with an annual limit of $1,200 on the credit amount (the lifetime limit on windows will also disappear). So if you spread out your eligible housing projects, you can claim the maximum credit each year. Annual limits for specific types of qualifying upgrades will also be changed – and for the better. From 2023, they will be:

  • $150 for home energy audits;
  • $250 for an exterior door ($500 total for all exterior doors);
  • $600 for exterior windows and skylights; central air conditioners; electrical panels and some related equipment; natural gas, propane or fuel oil water heaters; natural gas, propane or oil furnaces or hot water boilers; and
  • $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps and biomass stoves and boilers (for this category alone, the annual limit of $1,200 may be exceeded).

For qualifying home improvements after 2024, no credit will be given unless the manufacturer of any item purchased creates a Product Identification Number for the item and the person claiming the credit includes the number on their tax return.

Finally, the revised credit will be extended until 2032.

Residential Clean Energy Credit

The second credit homeowners are considering is the current Energy Efficient Residential Mortgage Credit, which is also getting a new name under the Inflation Reduction Act. It is now called the Residential Clean Energy Credit. The credit, which was previously set to expire in 2024, is also being extended to 2034.

In addition to a name change and extension, the Inflation Reduction Act also increases the credit amount. Previously, the credit was worth 26% of the cost of installing qualifying systems that use solar, wind, geothermal, biomass or fuel cell energy to generate electricity, heat water or regulate temperature in your house. (The credit for fuel cell equipment was limited to $500 for each half kilowatt of capacity.) The credit amount was also set to drop to 23% in 2023 and then expire in 2024. Under the Reduction Act inflation, the credit amount increases to 30% from 2022 to 2032. It then drops to 26% for 2033 and 22% for 2034. The credit will then expire after 2034.

The scope of the credit is also adjusted under the Inflation Reduction Act. It no longer applies to biomass furnaces and water heaters, but it will apply to battery storage technology with a capacity of at least three kilowatt hours from 2023.

Rebates for high-efficiency electric homes

Although not a tax credit, the High-Efficiency Electric Home Rebate Program will also help American families go green. The program, which was added by the Reduction of Inflation Act, will provide rebates to low- and middle-income families who purchase energy-efficient electrical appliances. To qualify for a refund, your total annual family income must be less than 150% of the median income where you live.

Eligible owners can earn rebates of up to:

  • $840 for a stove, cooktop, stove, oven or heat pump dryer;
  • $1,750 for a heat pump water heater; and
  • $8,000 for a heat pump for space heating or air conditioning.

Discounts for non-appliance upgrades will also be available up to the following amounts:

  • $1,600 for insulation, airtightness and ventilation;
  • $2,500 for electrical wiring; and
  • $4,000 for an upgrade to the electric charging service center.

However, there are limits to the amount that some families can get. For example, a rebate cannot exceed 50% of the cost of an eligible electrification project if the family’s annual income is between 80% and 150% of the area’s median income. Each qualifying family will also be limited to a maximum of $14,000 in total rebates under the program.

The $4.5 billion to be allocated for rebates will be distributed to families through state and tribal governments that establish their own qualifying programs. The funds will be available until September 30, 2031.

Learn more about the Inflation Reduction Act

The Inflation Adjustment Act was signed into law on August 16, 2022. For more information from Kiplinger on this climate, health and tax legislation, see:

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